06/03/2023
General Comment
The optimistic view of the markets that dominated a few weeks ago in relation to the path of inflation is gradually beginning to change. Markets believed that after the sharp decline in inflation in the United States that the problem was beginning to be contained and that central banks would soften their stance on their decisions about the next rate hikes. However, recent announcements are inconsistent with this belief. Inflation indicators are still high. The Eurozone and many European countries took the lead last week with announcements that showed inflation was moving down very slowly.
In addition to this pessimistic attitude is the deterioration in the macroeconomic results we have seen in the past week. Durable goods orders in the United States fell sharply (-4.5%) in January. Manufacturing has the same picture but towards the end of the week, the announcement of the PMI Services Index had a very positive picture and helped the overall recovery of the markets. Europe also has the same macroeconomic picture: unemployment, business confidence, and PMI indicators were below market expectations.
The war in Ukraine is currently the biggest political risk and does not seem to tend to defuse or provide a window for a peaceful solution. China’s involvement, in this case, has further complicated things. However, China is the biggest hope for the recovery of the global economy based on the results it announces and on expectations for the foreseeable future. Equity markets capitalizing on this optimistic stance and thirsting for good news reacted upward. Most commodities such as gold and oil had also profitable performance. In the forex market, the dollar dropped, and higher-risk currencies like the euro and sterling have regained some strength. Bond yields were generally bullish with the U.S. 10-year being above 4% but falling below that threshold toward the end of the week. Finally, cryptocurrencies found a new reason to perform losses as we will see below.
The current week is an important one for financial markets. Fed chief Jerome Powell’s testimony to Congress and the announcement of new U.S. jobs (NFPs) dominate. Eurozone retail sales and GDP are the most important announcements for the European continent, while inflation in China, UK GDP, and interest rate announcements from the central banks of Canada, Australia, and Japan stand out for the rest of the world.
SP500
With bullish trends, the US SP500 index closed last week, at 4,046 points and profits of 1.20%. The market sentiment improved significantly by the end of the week. Statements by central bankers calmed down the markets as they predicted a 0.25% interest rates hike in the next decision session of the Fed (March, 22nd), instead of 0.50% which was heard after the slow de-escalation of the inflation. Until last Wednesday the sentiment was sour and this was indicated by the higher bond yields, as the US 10-year bond yield exceeded well the threshold of 4%. Besides the perception regarding Fed’s next moves, there was also some good news from macroeconomic results: initial jobless claims were announced below 200K for one more week, and the services PMI was announced on Friday at 55.1, beating the expectations of the markets. As the SP500 returned to prices above 4,000 points with a bullish week, after three bearish ones there is optimism that there can be a further upward reaction. The bearish mood may return below 4,000 points but we may try long positions this week.
DAX30
The German DAX40 index was bullish last week, closing at 15,578 points, with profits more than 2.40%. The last two days of the week were explosively bullish for DAX40. Although the inflation persists at high rates in Eurozone and Germany and a 0.50% interest rate hike is very likely in March, the markets react positively. The winter which is about to end keeps energy prices low and sequesters the ultra-bad scenario of a strong energy crisis. The German macros seem healthy so far: the unemployment rate was unchanged in February at 5.5%, the trade balance was very big at 16.7 billion euros and PMIs remain above 50 which is a sign of economic expansion. The index is very close to the important resistance of 15,660 points which is also the highest price of the last year so the sentiment is positive and we may try long positions this week.
FTSE100
The British FTSE100 index moved upward last week, closing at 7,947 points, gaining more than 0.85%. The index remains close enough to its all-time high price of 8,047 which took place a few weeks ago. There is a blurred picture regarding the next steps from the Bank of England. Andrew Bailey said that further tightening of the monetary policy may be appropriate but he also mentioned that this will be depended on the data that will be announced. In any case, what the markets perceived was positive and the FTSE100 had a bullish rally at the end of the week. PMIs (composite and services) that were announced on Friday also helped the bullish trend. Besides the central bankers’ statements, this week the markets will focus on the GDP announcement on Friday. Since the price is still below 8,000 points and since the picture from the BoE remains blurred, we may try short positions this week.
Gold
The previous week was sharply bullish for gold, with the next month’s futures closing at $1,862 and profits close to 2.50%. It was the most strongly bullish reaction for gold during the last seven weeks. The dollar was weak on the basis of the opinion that the next interest rate hike will be (most likely) 0.25% and as the gold is denominated to dollars, was favored enough. The other competitive asset class which is the bonds, had a rally last week with the US 10-year bond yield surpassing the milestone price of 4% but the big de-escalation on Friday, from 4.06% to 3.95% helped significantly the gold to perform a bullish rally. Positive results from the US and Chinese PMI indicators also affected positively the prices of gold. Above the resistance of $1,873, we may see an acceleration of the recovery so long positions is our selection for the current week.
US Oil
Last week was strongly bullish for oil with next month’s futures closing at $79.83, with profits approaching 4.50%. Last Friday was the most bullish day during the last month as the news from China is pretty encouraging. China which is the biggest oil consumer in the world seems to recover strongly after the COVID lockdowns. This fact can be verified by the very high rates of PMIs and factory activity. So, the perception of the markets is that there will be high oil demand and the prices were in a bullish trend. The weekly rally was not affected by the unexpected increase in oil inventories in the USA. Markets eyes are more turned in China than any other place in the world right now. Regarding the supply, Russia’s oil production reached its pre-sanction level in February and the output from the organization of the Petroleum Exporting Countries also rose, according to a Reuters survey. If the oil price exceeds the resistance of $80.60 may escape the price zone between $70 and $80 that it is moving in several weeks. Otherwise, most likely it will remain in this zone so we may try short positions this week.
EURUSD (Euro vs US Dollar)
Last week was a bullish one for EURUSD which opened at 1.0548 and closed at 1.0633. Inflation in the Eurozone was announced for February at 8.5% against the 8.2% that markets had expected. This has triggered scenarios of an even more aggressive stance by the European Central Bank at its next meetings with corresponding interest rate hikes. Christine Lagarde said in a speech that prices have not stabilized yet. On the other hand, some expectations that had been created in relation to the Fed and for the next increase in interest rates seem to be limited according to statements by central bankers. Most likely the next hike will be 0.25%. That divergence helped the euro to recover and the dollar to suffer losses. Added to this was the improvement in investment sentiment we saw on Friday that helped currencies like the euro recover further. This week’s volatility is expected to increase because both Powell’s speeches to Congress and the announcement of the U.S. labor market are considered particularly important. The Eurozone also announces GDP and retail sales and therefore important news will also come from the European continent. If the pair manages to exceed 1.07, we may see a further rise for this reason we prefer buy positions this week.
GBPUSD (Great Britain Pound – US Dollar)
Bearish was last week for GBPUSD, which opened at 1.1947 and closed at 1.2042. The exchange rate managed to recover above 1.20, based mainly on the weakening of the U.S. dollar. The dollar weakened because it seems to be dominated by views that at the Fed’s next meeting in a few weeks, we should expect a hike of 0.25% instead of 0.50% last heard. But sterling has also been on the rise, mainly on the basis of what Andrew Bailey said in a speech last Wednesday. He said more interest rate hikes by the Bank of England might be appropriate. The speeches of Huw Pill and Catherine Mann that had preceded them had more or less the same meaning. Along with the important announcements from the United States, especially in relation to the labor market, there is also the announcement of the UK GDP next Friday, so this week is particularly important. If the pair manages to stay above 1.20, it may be able to look higher and that is why we select buy positions this week.
USDJPY (US Dollar – Japanese Yen)
USDJPY moved downward last week, opening at 136.41 and closing at 135.81. The weakening U.S. dollar was the main cause for this corrective move. Rising bond yields limited losses that could have been considerably larger. The week began with a speech by the new head of the Bank of Japan, Ueda, who stressed once again that loose monetary policy was going to continue and that he aims to increase prices and wages. These statements do not allow the Japanese currency to breathe despite the weakness of the US dollar that we have seen. Japan’s inflation announced Friday for February showed signs of de-escalation despite the loose monetary policy. The rest of the announcements for the Japanese economy, mainly for retail sales and industrial production were positive. We prefer
EURJPY (Euro – Japanese Yen)
Bullish was last week for EURJPY which opened at 143.91 and closed at 144.42. It was the third consecutive bullish week in a row for the pair as the high inflationary rates in Europe help the opinion that the ECB may act even more aggressively than the expected rates hike by 0.50% in March. Also, the inflation drop that we saw in Japan combined with Ueda’s statements for carrying on the ultra-loose monetary policy, make the Japanese currency weaker. All the above, justify the mini-rally of the last weeks which may continue if there’s a breakout above 145.60 which is the highest price of the last 3 months. We prefer buy positions for one more week.
EURGBP (Euro – Great Britain Pound)
Last week was practically neutral for EURGBP which opened and closed around 0.8830. Both of the currencies, the euro and sterling have reasons to be strong. Since inflation persists in the Eurozone there’s still a long way to go for the monetary policy tightening by the ECB. Christine Lagarde’s statements verify this perception as she said that inflation in the Eurozone will stay high in the near term so a 0.50% European Central Bank interest rate increase later this month is increasingly certain. On the other hand, the statements by Andrew Bailey (head of BoE) were also in a hawkish stance and caused a strengthening of the sterling that kept the balance in the pair. ECB seems more determined at the moment though so we may try buy positions this week.
USDCAD (US Dollar – Canadian Dollar)
Slightly bearish was the last week for USDCAD, which opened at 1.3608 and closed at 1.3596. The US dollar was particularly weak and the oil prices had a profitable performance but the Canadian currency could not take advantage. The reason is the unexpected negative result of the Canadian GDP that was announced on Wednesday. During the fourth quarter of 2023, markets expected a 1.5% growth, significantly lower than the 2.3% of the previous quarter. The result was even worse and disappointing: 0%. After that, it was perfectly reasonable that many concerns & fears occurred regarding the Canadian economy. Building permits and labor productivity that were announced on Friday were also in deep red so the pair could not find the recovery support. As the markets digest this news and if the US dollar’s weakness carries on, we may see bearish trends for USDCAD so we may try sell positions this week.
USDCHF (US Dollar – Swiss Franc)
The USDCHF had a downward course last week as the opening price was at 0.9396 and the closing price at 0.9360. The main reason was the weakness of the US dollar but the Swiss franc was not able to gather extra strength due to the macroeconomic results that were released last week. The only positive result was the KOF Leading indicator which was announced to be 100 vs 98 the markets expected. The Swiss GDP for the fourth quarter of 2022 was released at 0%, well below the 0.3% that markets expected and retail sales dropped by 2.2% in February. It was a weak picture of the Swiss economy and the USDCHF could not develop a strong bearish trend, similar to the other pairs that contain USD. In case of continuous weakness of the dollar, the pair may not hang on anymore, so we prefer sell positions this week.
AUDUSD (Australian Dollar – US Dollar)
Bullish was the last week for AUDUSD, which opened at 0.6730 and closed at 0.6769. As the Australian economy is strictly connected to the economy of China, the Chinese recovery also helps the Australian dollar to recover. Combined with the weakness of the US dollar, last week’s uptrend should be stronger but the macroeconomic results of Australia didn’t help. The GDP of the fourth quarter of 2022 was announced at 0.5% vs 0.8% that markets estimated. There was also a huge drop in building permits in January by 27.6% compared to December. Finally, home loans dropped by 4.9% in January. A positive exception to the above was the good results of the Australian PMIs. Even if the weakness of the US dollar carries on, we may see no solid bullish reaction at the AUDUSD so we may try sell positions this week.
Bitcoin
Last week, Bitcoin was bearish and closed at $22,428 with losses of 4.80%. The new bad thing for the cryptocurrency ecosystem is Silvergate. Reuters wrote that Silvergate (leading bank for innovative businesses in fintech and cryptocurrency) reported a $1 billion loss for the fourth quarter as investors raced to withdraw deposits in the wake of crypto exchange FTX’s bankruptcy, and the firm’s troubles highlight the fragility of confidence in digital assets. Silvergate Capital Corp said on Friday it made a “risk-based decision” to discontinue the Silvergate Exchange Network, its crypto payments network, two days after the digital asset-focused bank raised doubts about its viability as Reuters also wrote. Also, Bybit, a big crypto exchange, suspended U.S. dollar deposits and withdrawals through wire and bank transfers due to “service outages from a partner,” in a Saturday announcement, without naming the partner but there are certain suspicions that this partner is Silvergate. The next support for Bitcoin is close to $21,300 and we prefer short positions for one more week.
IMPORTANT DISCLAIMER
The information in this report is of a general nature only. It is not a piece of personal financial advice. It does not take into account your objectives, financial situation, and personal needs.
a-Quant is not responsible for your actions and recommends you contact a licensed financial advisor before acting on any information contained in this general information report.
